## The TAX SAVING in NPS – A Calculation

January 15, 2018

A lot of young earners are fascinated with the additional tax saving offered by NPS for an investment of Rs. 50000, every FY under section 80CCD(1b). Here I’m going to check the impact of TAX saving. Are we really saving tax today?
To get the answer or to start a calculation, few assumptions are made. Here are the assumptions for your kind considerations – the readers of this blog.

The investor aka NPS subscriber –

1. Age 30Y old at the time of first investment in NPS.
2. Only Rs. 50000 yly is invested at the start of year, here year means Financial Year.
3. The retirement is taken at age 60Y. So the total investment period is 30Y.
4. The corpus is growing at 12% rate in all these 30Y.
5. Total amount over these 30Y, invested in NPS is Rs. 1500000 (50000*30 = 1500000).
6. The maturity value of NPS at age 60Y is Rs. 13514630
7. The 40% corpus is withdrawn tax free. Another 20% is withdrawn taxable and remaining 40% is used to purchase annuity from LIC under it’s immediate annuity plan, where, the Annuity (pension) is payable Yly for both husband and wife and after death of both, the purchase price is returned to to nominee/legal heirs. Point to be noted, the data available on LIC site, showing an annuity rate of 6.3% (roughly) for age 60Y person.
 Investment year Maturity year Year to remain invested The growth rate @ 12% Growth multiple Amount Invested Corpus for each individual investment Tax saving in 30% tax slab. Tax saving in 20% tax slab. 2018 2048 30 1.12 29.95992 50000 1497996.1 15450 10300 2019 2048 29 1.12 26.74993 50000 1337496.5 15450 10300 2020 2048 28 1.12 23.88387 50000 1194193.3 15450 10300 2021 2048 27 1.12 21.32488 50000 1066244 15450 10300 2022 2048 26 1.12 19.04007 50000 952003.61 15450 10300 2023 2048 25 1.12 17.00006 50000 850003.22 15450 10300 2024 2048 24 1.12 15.17863 50000 758931.45 15450 10300 2025 2048 23 1.12 13.55235 50000 677617.36 15450 10300 2026 2048 22 1.12 12.10031 50000 605015.5 15450 10300 2027 2048 21 1.12 10.80385 50000 540192.41 15450 10300 2028 2048 20 1.12 9.646293 50000 482314.65 15450 10300 2029 2048 19 1.12 8.612762 50000 430638.08 15450 10300 2030 2048 18 1.12 7.689966 50000 384498.29 15450 10300 2031 2048 17 1.12 6.866041 50000 343302.04 15450 10300 2032 2048 16 1.12 6.130394 50000 306519.68 15450 10300 2033 2048 15 1.12 5.473566 50000 273678.29 15450 10300 2034 2048 14 1.12 4.887112 50000 244355.61 15450 10300 2035 2048 13 1.12 4.363493 50000 218174.66 15450 10300 2036 2048 12 1.12 3.895976 50000 194798.8 15450 10300 2037 2048 11 1.12 3.47855 50000 173927.5 15450 10300 2038 2048 10 1.12 3.105848 50000 155292.41 15450 10300 2039 2048 9 1.12 2.773079 50000 138653.94 15450 10300 2040 2048 8 1.12 2.475963 50000 123798.16 15450 10300 2041 2048 7 1.12 2.210681 50000 110534.07 15450 10300 2042 2048 6 1.12 1.973823 50000 98691.134 15450 10300 2043 2048 5 1.12 1.762342 50000 88117.084 15450 10300 2044 2048 4 1.12 1.573519 50000 78675.968 15450 10300 2045 2048 3 1.12 1.404928 50000 70246.4 15450 10300 2046 2048 2 1.12 1.2544 50000 62720 15450 10300 2047 2048 1 1.12 1.12 50000 56000 15450 10300 1500000 13514630 463500 309000

7. Now check the next table.   Here it goes.

 Tax free 40% withdrawal Taxable 20% withdrawal 40% Annuity purchase amount Yly annuity amount 5405852.1 2702926.1 5405852 340713 Tax @30% on withdrawal 835204.15 105280.3 Tax @20% on withdrawal 556802.77 70186.85

From the 2nd table How many of you can see the impact of TODAY’s TAX SAVING resulting in a larger TAX outgo tomorrow?
Point to be noted, the tax outgo on annuity is lifelong. Year after year, till the couple is surviving.

## Post Retirement Planning

May 11, 2014

The Idea of this post came from here. Dear Viren Phansalkar requested for a post on Post Retirement Planning. A lot of articles have been written on pre retirement planning. How one should invest, where to invest, when to start, when to stop, when to switch for a wonderful retirement. All this stuff is concentrated on how to prepare your cake to eat in your post retirement life. But not much info is there on how to deploy the corpus post retirement to earn return as well as income so that corpus can sustain the expenses till death which is going to be some 25-40 years away in post retirement life.

Few good posts are available with important calculators on dear Pattabiraman’s frrefincal.com Here are 2 such posts.

http://freefincal.com/the-retirement-bucket-strategy-simulator/

&

Few days back we also have a detailed group discussion in our FB group for a case study on post retirement planning. There can be multiple ways to deploy ones money for consumption in post retirement life. But the important thing is, the corpus should outlived the investor and spouse. In case the corpus deplete well before the actual death of investor (including spouse’s death), the deployment of money was not proper we can say.

Now problem in post retirement planning is complex due to 2 things.

1. Inflation

2. Risk Tolerance

1. Inflation – it’s the single biggest enemy to any retirement portfolio in post retired life. Can any one of us imagine the impact of inflation in just 10Y time frame on a person from age 60 to 70? Most of you ‘ll quickly put a basic figure like 5-6-7-8-9 or 10% for retail level inflation. Is it the only inflation? Certainly not. The biggest impact of inflation ‘lll come in the form of healthcare cost. Interestingly this may anywhere from 15 to 25% and even more if health condition is not good. People may say that health insurance may take care off such inflation. Really? Try to read the queries on various forums where people want to purchase health insurance either for their own or for parents. Most of the time, the covers are either not available for the required sum assured or come with a hefty prem.

2. Risk Tolerance – When we are in job, we can bear few bad years of loss on our portfolio as we have both (time as well as resources – fresh money) to counter these loss. Once we set our feet in sunset years, neither we have enough time on our hand nor the resources – fresh money to overcome such loss on portfolio. This situation severely restricts the portfolio creation and deployment. So in a sense our risk tolerance level comes down to a very low point. This low risk tolerance may not allow to deploy more money in growth assets as safety of capital is prime importance here.

A very  generic and crude solution is to split the whole corpus in following manner (what dear Pattu called bucketing).

1. 1 year equal expenses in SB account

2. Next 2 years equal expenses in FDs and liquid funds

3. Year 4 to 10 years’ expenses in FDs, short term funds and Arbitrage funds.

4. Year 10-20 years’ expenses in instruments at 3 above as well  as add some Eq. to provide growth here.

5. Year 20+ years’ expenses in instruments + higher allocation in Eq.

I repeat the above solution is very generic in nature and the things should be done as per each individual’s own situation.